I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
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Richard Egan Estate Subject to 40% Penalty on Doomed Shelter

I thought I was done with Fidelity International Currency Advisors back in January when I wrote the fourth post in what I call my EMC trilogy. Last December,the legal team defending EMC founder Richard Egan’s ill fated tax shelter pulled out a small victory after having lost spectacularly. Of the $220,944.65 in litigation expenses that the feds sought to charge them with $65,896.10 was disallowed. It was not much of a victory particularly when weighed against $80,000,000 in tax and penalty. Perhaps emboldened by the small win, they went hunting for bigger game. They were trying to get the penalty cut in half. The decision, another loss for team Egan, is a good read. It lays out the original plan in all its absurdity in a very clear manner:

To this end, in July 2000 Egan formed Fidelity as a limited liability company federally taxed as a partnership. Egan was one partner; the other principal partner was Samuel Mahoney, who was an Irish citizen. Common shares were initially assigned 93 percent to Mahoney and 5 percent to Egan; Egan contributed $2.7 million in cash and certain interest rate options valued at $1.6 million, and Mahoney contributed $651,000 in cash.

Then, in October 2001, Fidelity entered into a set of transactions whereby it purchased and sold options, related to foreign currency exchange rates and configured in pairs: the terms set for each pair (as to premium, strike price, maturity dates, and possible payout) assured that a loss on one option in a pair would be offset by a corresponding gain on the other. In substance, the transaction would provide virtually no opportunity for a net gain but also no risk of a net loss.

One week later, Fidelity terminated four of the options that had gained in value due to fluctuations in the currency exchange rates. The offsetting options in the pairs, correspondingly reduced in value, were not terminated. Instead, the proceeds from the terminated options were used to purchase replacement options that would ensure that the eventual losses taken by the partnership when it terminated the original options that had lost value and the replacement options would offset the gains initially realized.

This generated net taxable gains on Fidelity’s books of about $174 million from the options that had been terminated. But under the tax laws Fidelity pays no taxes; rather its gains and losses are assigned to the partners in accordance with their ownership shares in the partnership and taxed to the partners on their own returns. 26 U.S.C. §§ 701–702 (2006). Because of the then-existing 5 and 93 percent share allocation, Egan was assigned $7.1 million net gain and Mahoney $163.3 million net gain.

Then, a week later, in early November 2001, Egan bought 88 percent of the common partnership interest from Mahoney for $325,500 and so owned 93 percent with Mahoney being reduced to 5 percent. A month later, in early December, Fidelity terminated the four remaining original foreign currency options as well as the replacement options acquired immediately after the October termination. Not surprisingly in light of the design of the option pairs, the December loss ($178.1 million) only modestly exceeded the original gain.

Fidelity now allocated the $178.1 million loss in proportion to the reallocated ownership shares: Egan was allocated $165.8 million in loss and Mahoney $8.8 million. The net economic loss to the partnership from all the offsetting foreign currency options was just over half a million dollars; advisory fees brought the total cost to $4.1 million–a cost dwarfed by the potential tax benefits for Egan.

So Egan and Mahoney were partners. The partnership had unrecognized gains and unrecognized losses. The partnership recognized gains that were allocated mostly to Mahoney. Ownership was switched and it recognized losses that were mostly allocated to Egan. Richard Egan did not get to be a billionaire by doing deals like that. And people got paid 4.1 million for this bullshit. That is what they called value billing. The Egans could not get brilliant ideas like this from the regional firm that had been serving their family. They hired an attorney, Stephanie Denby to search out the best deal being offered by the sophisticated national firms, finally settling on KPMG. She or her firm must have been on an hourly basis as their was a bit of envy in her comments to the CFO of the family office:

On May 26, 2000, Denby sent Reiss an e-mail regarding the previous day’s meeting and her discussions with Helios after the meeting concerning fees:

… after the meeting I discussed with Helios the fees. The fees are based on a 3% rate. If KPMG were not involved Helios would just pocket a larger percentage. Since our connection came from KPMG, Helios would pay them a referral fee anyway. I think at the same rate. So [their] involvement does not cost more but just results in reallocation of the base fee. I know from other situations this reallocation occurs simply from [our] getting the name [from] KPMG. We are in the wrong business!

Regardless, finding an accommodating Irishman to pick up income so you could take losses was not all that was involved in this plan. The loss allocations would do Mr. Egan no good if he did not have basis to absorb the loss. To accountants this is an insurmountable problem. Not so to tax attorneys. I explain how they manufacture basis out of thin air in this post. It pains me to repeat it. You may have heard the old accounting joke “Debit by the window – credit by the door”. Well that accountant went to law school and got an LLM in taxation and spent too much time looking at Code Section 752 and converted to “Debit by the window – credit out the window”.

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IS THE EURO FINISHED, I HOPE SO, THANKS TO KPMG’S MASSIVE ACCOUNTING FRAUDS PERPETRATED ON SOVERIEGN GOVERNEMNTS AND BANKS, MY SHORT DREAMS MAY SOON COME TRUE, THANKS KPMG YOU TRULY ARE THE GIFT THAT KEEPS ON GIVING, JUST LIKE CLAMYDIA.

Holy cow, KPMG audits Deutsche Bank is it a coincidence or a situation of birds of a feather flock together, combined both firms have not only plead guilty to committing tax fraud but paid the U.S. government over $1 billion for committing such tax fraud, yikes.

Of course, Deutsche Bank did not hire Bob Bennett of Skadden Arps to DO VERYTHING POSSIBLE ON BEHALF OF KPMG to help the Department of Justice indict KPMG partners (like KPMG did) not withstanding none of the partners even worked in KPMG’s massive corporate tax fraud department and the email from KPMG’s very own Chief Counsel dated March 3, 2005 instructing Bob Bennett that everything he was telling the DOJ were lies.

In any event I digress, KPMG’s fraudulent accounting is helping prop up the foreign banks with all of their bad debt, just see the quotes from the Financial Times articles below.

We all know the PIIGs are done yet even the mighty Deutsche Bank does not reserve for the total amount of the losses we all know are there, in large part thanks to KPMG’s fraudulent accounting strategies that do not require the bank to write off or write down the debt to its true value, likely zero.

I am considering starting an investment fund that merely shorts any company KPMG audits based on the fact that upon inspection of the fraudulent financial statements KPMG invariably signs off on, there will be massive accounting and tax fraud much of which will have been sold to the client by KPMG.

For the record I am not short Deutsche Bank nor do I ever contemplate shorting this stock (unlike KPMG and Bob Bennett of Skadden Arps I am not a liar and a thief ) but I am short the Euro, Franc, Yen and long EUR/CHF. Hopefully the lies of KPMG and Deutsche Bank will make all of my short dreams come true.